19 June 2020
New procedure for foreign disputes involving persons under anti-Russia sanctions

On 08 June 2020, the President of the Russian Federation signed the Federal law “On amendments to the Arbitrazh Procedure Code of the Russian Federation in order to protect the rights of individuals and legal entities in connection with restrictive measures imposed by a foreign state, state association and (or) union and (or) state (interstate) institution of a foreign state or state association and (or) union” (hereinafter – the Law). The Law comes into effect on 19 June 2020.

The Law introduces two new articles (248.1 and 248.2) to the Arbitrazh Procedure Code of the Russian Federation (hereinafter – APC), which relate to the procedure for disputes involving persons subject to restrictive measures by foreign states or unions (hereinafter – Sanctions).

Article 248.1 defines the exclusive competence of the Russian arbitrazh (state commercial) courts in three categories of disputes:

1) with the participation of Russian persons under the Sanctions imposed by foreign states / unions / associations or (inter)state institutions of the specified subjects;

2) with the participation of foreign persons under the Sanctions, if the reason for this was the Sanctions against Russian persons;

3) with the participation of any persons, if the basis for the dispute was the Sanctions against Russian persons.

This rule applies if the parties’ agreement to submit the dispute to a foreign court or international commercial arbitration outside the Russian Federation (hereinafter – ICA) is unenforceable due to the application of the Sanctions against one of the parties to a dispute which creates obstacles to access to justice.

If the dispute falls under one of these categories, the party is entitled to request the Russian arbitrazh court (1) to resolve the dispute or (2) to prohibit the initiation or continuation of proceedings in a foreign court or ICA. In other words, one can “transfer” a dispute to the Russian jurisdiction at any stage until the end of the proceedings.

At the same time, the Law defines only the rights, but not the obligations of a person, and, as a result, any agreement between the parties on dispute resolution remains in force until a person applies to the Russian court. If the person against whom the Sanctions are imposed initiated a dispute in a foreign jurisdiction himself or did not object to the consideration of the dispute by a foreign court or ICA, such a decision will be recognized and enforced in the Russian Federation.

Article 248.2 of the APC defines the procedure for a person to apply to the Russian arbitrazh court for a resolution of a dispute or a prohibition to initiate or continue proceedings. In particular, applicants must indicate the circumstances that prevent parties from implementing an agreement (if any) to transfer their dispute to a foreign court or ICA.

The Law also determines the right of an applicant to claim money in his favour from the other party, acting in violation of the prohibition to initiate or continue proceedings in a foreign jurisdiction issued by the Russian arbitrazh court. The sum due is to be determined by the court, but in any case should not exceed the amount of claims filed in a foreign court or ICA.

Prospects

During the discussion in the first reading, the authors of the bill pointed out that there are no precedents for the adoption of similar laws by foreign countries. However, given the unprecedented scope of sanctions against Russia, the lawmakers insisted that the Russian Federation must take measures to protect its citizens.[1]

The legal value of the Russian court’s acts prohibiting the continuation of proceedings abroad in foreign jurisdictions remains unclear. According to the authors of the bill, even if a foreign court or ICA does not comply with the order of the Russian court to terminate the proceedings, the decision shall not be enforceable in Russia. Interestingly, the Presidium of the Supreme Arbitrazh Court of Russia in 2013 pointed out that the ban on participating in a dispute before the Russian courts, issued by a foreign court as interim measure, does not preclude the consideration of the case by the competent Russian court.[2] One can expect that a similar approach will be followed by foreign courts, and the decisions of Russian courts prohibiting foreign proceedings will not be enforced in foreign states.

The Law provides for the recovery of money (in the first reading – astreinte, but the term is excluded in the final adopted version) in favour of a person under the Sanctions, if the opponent against whom the ban was issued did not comply with it. The prospect of enforcement of such court ruling outside Russia may be doubtful. The measure is designed to be primarily applied in Russia against companies that have property in Russia.

The adoption of the Law may have negative impact on management of disputes’ risks of international companies operating both in Russia and in the countries which have adopted the sanctions – foreign companies that cooperate with the Russian sanctioned companies now face risks of foreign court or ICA decisions get unenforceable in Russia and may be subject to monetary risks in cases of non-compliance.

Recommendations

As sanctions may greatly complicate foreign and ICA disputes to sanctioned companies (access to lawyers, refusals of Tribunal Members to participate, difficulties in payment of duties and fees), such risks should be carefully considered when drafting contracts with the Russian companies. Given the extensive nature of Sanctions and often-vague wordings of SDN lists, the new Law may have significant impact on arbitration agreements or jurisdiction agreements already concluded with the Russian companies. The new amendments require a careful review of dispute resolution clauses present in the current contracts and the inclusion additional guarantees on the access of the Russian companies, potentially falling under the sanctions, to all elements of justice, if new sanctions were imposed.

For companies already under Sanctions alternative dispute resolution clauses could be considered, including domestic arbitration in Russia, to avoid the consideration of disputes by the arbitrazh courts, if a foreign party would not wish that. In most serious cases, steps may be required to secure the property of a foreign party in Russia, in case of a potential non-compliance with the order of the Russian arbitrazh court prohibiting the continuation of a foreign proceeding.

[1] https://video.duma.gov.ru/watch/?id=319063

[2] Para. 32 of the Information letter of the Presidium of the Supreme arbitrazh court of the Russian Federation dated 09.07.2013 No. 158 “Review of the practice of consideration of the cases involving foreign persons by arbitrazh courts”.

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